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Tax Review Commission

MINUTES OF THE

TAX REVIEW COMMISSION

Friday, July 11, 1997 - 9:00 a.m. -- Room 405 State Capitol



Members Present:    
    Mr. James B. Lee, Vice-chair
    Mr. Mark Buchi
    Rep. Judy Ann Buffmire
    Sen. Lyle W. Hillyard
    Sen. E. George Mantes
    Ms. Carol McCormick
    Ms. Bonnie Miller
    Ms. Dorothy Owen
    Mr. W. Val Oveson    
    Rep. John Valentine
    Mr. Ray Wood


    
Members Excused:
    Mr. Gary Cornia, Chair
    Mr. Robert M. Graham

Members Absent:
    Judge Jon Memmott
    
Staff Present:
    Mr. Bill Asplund
     Executive Director
    Ms. Rebecca L. Rockwell
     Associate General Counsel
    Ms. Karen E. Mecham
     Secretary

Note:    A list of others present and a copy of materials distributed in the meeting are on file in the Office of Legislative Research and General Counsel.
    

1.    Call to Order and Approval of Minutes -- Vice-chair Lee called the meeting to order at 9:15 a.m. and welcomed members of the Tax Review Commission ("TRC").

     MOTION: Sen. Mantes moved to approve the minutes of the June 13, 1997 meeting. The motion passed unanimously. Mr. Buchi, Sen. Hillyard, and Rep. Valentine were absent for the vote.

    Property Tax Methodology -- Mr. Brent Eyre, Property Tax Division, Utah State Tax Commission ("tax commission"), distributed Utah Constitution Article XIII, Section 2, and gave an overview of the methodology to value centrally assessed property.

    Mr. Eyre paraphrased Utah Code Ann. Section 59-2-201 (1996) outlining the statutory property tax valuation mandates the tax commission must follow. He noted that by May 1of each year, the following property is to be assessed at 100 percent of fair market value as valued on January 1 of the taxing year: (1) property operating as a unit across state and county boundaries; (2) all property of public utilities; (3) all operating property of an airline, air charter service, or air contract service; (4) all geothermal fluids and geothermal resources; (5) all mines and mining claims; and (6) all machinery used in mining, and all property or surface improvements upon or appurenant to mines or mining claims.

    Mr. Eyre said that a statutory refinement of the definition of "centrally assessed" would be helpful. The TRC discussed the feasibility of taxing as centrally assessed property cable companies and companies reselling telephone services.

    Mr. Eyre said the properties are divided into two main categories: (1) "unitary property" and (2) natural resources. He defined unitary property as an integrated group of assets considered to be "one thing." He also defined "going concern value" as the premium on a group of tangible taxable assets considered to be a unit.

    Mr. Eyre outlined the three standard approaches to estimate value: (1) cost; (2) income; and (3) stock and debt (market). He said these approaches are used in correlating final estimates of value. He explained that in a unit valuation, the cost approach would subtract depreciation from historical cost to determine value. The income approach determines value by dividing income by the capitalization rate. The stock and debt approach determines value by adding liabilities to equity.

    Rep. Valentine said that he felt the present methodology has increased the values artificially. Mr. Eyre said that he believed that some methodologies will increase the value. Rep. Valentine challenged the members of the audience and the TRC to demonstrate that adjoining states have methodologies that produce a lower unit valuation. Chair Lee said that companies will be invited to respond to the tax commission's presentation at the next meeting. Mr. Asplund explained that in the telecommunications meetings, it was not possible to get information from the telephone companies on their tax burdens in various states. He asked that the companies provide their total tax burden as well as their property tax burden.

    Commissioner Oveson said that he would provide schedules comparing Utah to other states. Mr. Eyre said there are pitfalls in reviewing a comparison because not every state values the same unit as Utah. He said that some states do not include lease property in valuations, some states have adopted formulas that reduce the unit value, and some states do not tax personal property. He cautioned that unit values must be similar to make the comparison accurate. He noted there are standards set up by a national association to assist state tax professionals in making their systems comparable but each state legislature determines how those standards are applied. Mr. Buchi said that in his experience, counties have told him that historically centrally assessed properties have been undervalued. Mr. Eyre said that he felt the system is providing the proper value.

    Mr. Eyre discussed the formulas for apportioning values to the local jurisdictions. He noted that there are two types of property: (1) mobile property (rolling stock) such as railroads, highways, and flight paths; and (2) situs or investment property.

    Mr. Eyre discussed natural resources and said that the tax commission is statutorily mandated to use the capitalized net revenue method. He outlined the rules used to make the property valuation determinations. He also noted that there has been a property tax shift from centrally assessed to locally assessed properties. He said that the natural resources tax base has been depleted by about $8 million.

    Sen. Mantes asked if the laws governing centrally assessed property valuations need to be refined because there is $2 billion in dispute again this year. Mr. Eyre said he felt that "intangibles" need to be better defined. Mr. Eyre said he was not in favor of statutorily mandating methodology because it limits flexibility in changing economic times.

    Vice-chair Lee announced that centrally assessed taxpayer representatives and others would be invited to respond to the tax commission's presentation during the August meeting. Commissioner Oveson noted that while counties are generally well represented at hearings, cities, special taxing districts, and school districts are sometimes not represented.

3.    Legislative Options for Controlling a Tax Shift (1997 General Session H.B. 129) _ Mr. Asplund gave an update on the decision made by the Revenue and Taxation Interim Committee at its July 9, 1997 meeting to control a tax shift from locally assessed to centrally assessed properties. The tax shift would occur under H.B. 129 provisions requiring the taxes on disputed centrally assessed property valuations to be escrowed and the disputed valuations to be removed from a taxing entity's tax base for purposes of calculating the property tax rate. Mr. Howe discussed a handout outlining the impact of the shift. He noted the shift affects the rural counties more significantly.

    Mr. Asplund said that, at the Revenue and Taxation Interim Committee meeting, two proposals were offered to control the shift. The first proposal would postpone the escrowing provisions for one year and allow taxing entities to include the disputed amounts in their tax bases. The second proposal would set the escrow amount at 25 percent rather than 100 percent of the disputed value, and allow taxing entities to incorporate 75% of the disputed valuations into the calculation of their tax bases. He noted the first proposal was adopted by the interim committee with a very close vote. Ms. Rockwell reviewed the legislation drafted for each proposal.

    Mr. Asplund said that there are statutory provisions authorizing a judgment levy if a taxing entity needs to generate revenues to satisfy a judgment lowering a centrally assessed taxpayer's property tax valuation. He added that H.B. 129 eliminated the statutory provision subjecting this levy to truth in taxation.

    Rep. Valentine said he felt that when the Legislature passed H.B. 129 all the information available now was not available then. In light of potential increases in centrally assessed appeals

as a result of the tax commission's WilTel decision regarding the taxation of intangibles, Rep. Valentine felt the legislation was necessary to allow the legislature time to review the centrally assessed appeals process before finalizing a solution. Rep. Buffmire said that she is not sure that necessary additional data will be available by the 1998 Annual General Session and therefore, the issue will not be reviewed. Sen. Stephenson said he proposed the 25-percent escrow amount because of the historical statistics on the percentage of successful appeals provided by the tax commission. He felt that the other provisions in H.B. 129 expediting the appeals process will help reduce the number and amounts of appeals so that the amount that needs to be escrowed will be reduced.

4.    Property Tax Valuation in Other States _ Chair Lee said that this item would be reviewed at a later date.

5.    Other Business--The next meeting of the TRC will be held on Friday, August 15, 1997, at 1:00 p.m. in Room 405.

6.    Adjournment--

     MOTION: Sen. Hillyard moved to adjourn the meeting at 12:25 p.m. The motion passed unanimously. Mr. Wood was absent for the vote.


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